HONG KONG, China — According to a closely watched report recently published by Bain & Company, a consultancy, and Italian luxury goods trade organization Altagamma, luxury sales growth in China has started to slow. Consumer spending on luxury apparel, accessories and other personal items is expected to climb by a relatively modest 8 percent in 2012, compared with 30 percent last year, leaving many wondering where future growth will come from.

Yet the growing spending power of middle income consumers, who rarely travel outside China, but increasingly crave foreign brands at prices they can afford, is providing cause for optimism and focusing attention on the growing opportunity in the country’s emerging ‘mass contemporary’ market.

Veronica Chou, daughter of apparel tycoon Silas Chou, was an early pioneer of mass contemporary, founding Iconix China, a Hong Kong-based brand management and investment company with a unique business model, back in 2008, after seeing an opportunity in the absence of mass American fashion brands in Beijing.

A joint venture between the Nasdaq-listed Iconix Brand Group (ICON.O) and Novel Fashion Holdings, Iconix China mostly works with well established American fashion brands owned by Iconix Brand Group. For each brand, Iconix China acquires trademark rights for the Greater China region, taking a 20 percent equity share, and then enters into a joint venture with a local partner to open stores and market the brand in China, with the ultimate goal of taking the joint venture public.

In the past few years, the model has thrived. Iconix China is currently engaged in eight different joint ventures, with a 20 percent stake in each, and has successfully launched a number of popular American mass contemporary brands in China, including Candies and London Fog, the group’s most successful operations, each with 300 and 250 China stores, respectively.

The fact that these brands are making waves in China may come as a surprise to Western fashion observers. BoF spoke with Veronica Chou to learn more about Iconix China, its unique model and the mass contemporary phenomenon.

BoF: How does the contemporary market in China compare with the rest of the world?

VC: Firstly, the definition of the word ‘contemporary’ is different here. In the West, it could refer to a designer brand, but in China the hierarchy is different. Luxury brands such as Gucci and Louis Vuitton sit on top, followed by local [designer] brands and second tier international brands (otherwise known as contemporary brands in America), which sell at a higher price point [here]. Below this you have the [mass] fashion and athletic markets which are huge businesses in third and fourth tier cities. We operate mainly between the mass and local [designer] brands, but at a lower price point. So even though many of our brands are international, we play in the local market.

BoF: Who’s buying these brands?

VC: We target local consumers, people who don’t have money to travel overseas, but want to buy foreign names. They shop on Taobao and are educated working class people with their own income. Some buy luxury brands, but often they save up to buy one thing, like a bag or wallet. They are not the typical luxury consumer you see in the [luxury] malls.

What they’re looking for is foreign design or style. Fashion is key for them. They buy things that are not seasonal because they don’t have a high income. They like to touch everything and try it on. Customer service is essential. They love to hear good things about how they look. Interestingly, the age group is a little older compared to their American counterparts.

BoF: How has the mass contemporary customer evolved since you first established Iconix China?

VC: They want foreign brands, because local brands are [selling] products that look and feel the same. They want to buy something that shows they have taste, because their peers also have money and they need to differentiate themselves. Because of this, choice is paramount as tastes differ so much from North to South. These people still don’t travel abroad much, although they aspire to.

BoF: What type of products are they buying?

VC: Unlike the luxury business, this segment is mainly about apparel. Many of these brands, especially the more established ones, are trying to branch into accessories like shoes and bags, so that customers don’t buy clothes alone. That being said, they are scared to launch bags as customers prefer to go to luxury brands for these items.

BoF: What are the current trends?

VC: Chinese prefer Japanese or Korean styling, so we sometimes customise the product to the market. With Candies for examples, we may use a lighter pink compared to the US. For us, the next trend is something like Joe Boxer, which is a bit more cartoony and cute. In the past two years Paul Frank has been doing really well and they want something similar. Cool brands that are a bit more street and urban are also coming up, such as Zoo York and Ecko. The Beijing Fashion Association are organising a trade show aimed at these brands called Chic Young Brands. And there’s also Novo. They are getting more traction in the affordable market.

BoF: Why do you prefer a joint venture model as opposed to franchising or licensing?

VC: With licensing, it’s hard to control or make money. How do you know if [your partner] is posting real numbers? They don’t need to open their books and that’s a risk. The partner also feels like they are borrowing your brand or are using it to elevate their own brand, so the interests are not directly aligned. Then, there’s the return on investment. You get a five to seven percent minimum per year at the beginning, but when you add those numbers up down the road it’s not as much as if you go public in a few years. With a joint venture, they own the trademark.

BoF: What should brands be wary of when it comes to joint ventures?

VC: Finding the right partner is very important. You need to find someone who understands the brand and won’t change it, but that also has the ability to open stores and set up a network. You need to go to someone who has been in the market and who has relationships. The other side of it is that we have less control. We let our partners edit and localise some of the designs or materials. It would be difficult for luxury brands to do this but for us it’s acceptable.

BoF: In the luxury market we’ve seen the trend of brands taking back ownership of their China businesses. Does this happen with mass contemporary labels?

VC: It’s very difficult. The issue, say with Gap or Abercrombie, is that they may be big companies, but they don’t have the right local people to help them launch properly and build a business. They need people based on the ground who have local knowledge. Luxury brands have had people based on the ground in China for many years. Plus the investment is huge. To open the stores that Gap and Abercrombie want is expensive.

BoF: What are the biggest challenges for mass contemporary brands launching in China?

VC: It’s about investment and time. Most big [luxury] brands like Louis Vuitton have invested a lot of money in China, but when you talk to mass contemporary labels, many of their CEO’s have never even visited the country. If you don’t know China and you are the strategy guy, how are you going to be successful?

You also need a lot of money, because China is all about retail stores. In America, you talk to Macy’s and they can potentially give you 200 stores or points of sale immediately. It’s a different set up in China. For us, our partners can open stores quickly. Usually by the second year we break even and by the third [year] we make money. I’m looking to open 500 stores for any of our brands in the next three to five years. But compare that to something like Michael Kors, which is luxury. It’s around 60 stores.

BoF: Is the contemporary market becoming more competitive?

VC: There is lots of competition. But how well they do depends on time. Our focus is opening stores, although we could do more marketing.

BoF: What drives this demographic to buy?

VC: It’s a little bit of everything. It’s integral to [open stores]. We bet on people walking into malls and checking out stores. Online you need to throw in money to get traffic. If you have a store, someone is bound to walk in, but it’s hard to get someone to your website. Walk-in traffic is key. We always try to have a few really profitable stores and use them to educate the landlords about location. Numbers are important because each of our stores generate less revenue than luxury brands. Outlets are also the best advertising. Chinese love shopping. Weekends spent at the mall is a major activity. They like to spend more on themselves.

BoF: Does social media influence their shopping habits?

VC: Social media is changing a lot of things. That being said, with the mass market, they like to go and see the product. We don’t push social media especially hard because China is such a big place. Someone may be watching your brand, but if it’s not available where they live it doesn’t matter. Our goal is to build a [store] network fast. We’re talking thousands of stores. Social media means it goes broad immediately and we need to have a store network to support that.

BoF: What advice would you give brands wanting to launch in China?

VC: Decide on your strategy, whether it’s distribution or joint venture. So many people come to me and say they want to come to China. What does that mean? How big do you want to be? Do a business plan, find out how much investment you need. Do you want to invest, or have someone else put up the money?

Also don’t assume people know you. There are many brands that are popular in the US that won’t be in China. Even if a brand says Michelle Obama is their customer, no one cares in China. They don’t know her as a celebrity in China, nor do they care. Celebrity endorsement is important, but it has to be Chinese celebrities.

Divia Harilela is an Associate Contributor at The Business of Fashion. She is also the founder of The D’Vine, a blog focused on the luxury and fashion market in Asia.